Virgin America Lands in the United States1

Introduction
Virgin America, Sir Richard Branson’s new low-fare airline, debuted on August 8, 2007 with
inaugural flights from New York and Los Angeles that landed simultaneously in San Francisco,
the company’s headquarters. The company has ambitious goals of growing on domestic U.S.
routes that serve major cosmopolitan markets where consumers are likely to value Virgin
America’s quality service. Some of the larger markets will be Atlanta, Los Angeles, Chicago,
Denver, Las Vegas, Phoenix, Dallas, Houston, and San Francisco.

Virgin Group
Virgin Group Ltd. is a conglomeration of separately run companies that bear the Virgin brand of
British celebrity Richard Branson. One of the companies, Virgin Atlantic Airways Ltd (Virgin
Atlantic) is fifty-one percent owned by Virgin Group and forty-nine percent owned by Singapore
Airlines. Virgin Atlantic is based in London at both London Heathrow and London Gatwick
Airports. It operates long-haul routes to the U.S., the Caribbean, Africa, the Middle East, Asia,
and Australia. Virgin Atlantic was founded in 1984, consists of a fleet of 38 aircraft and 29
destinations. Virgin Atlantic gained access to the highly coveted London Heathrow Airport after
the UK Government abolished the London Air Traffic Distribution Rules. In 2006, the airline
carried 4.9 million passengers placing them seventh among UK airlines and second in terms of
passenger-kilometers.
Comfort and amenities are key features of Virgin Atlantic aircraft. All aircraft offer
personal seat-back televisions that provide in-flight entertainment. The Upper Class seating,
which is equivalent to business class, is claimed to be the biggest in comparison to other airlines.
Upper Class seats offer in-seat laptop power and leads for iPods. These seats also have access to
a chauffeur, a lounge, an in-flight bar, and in-flight massages which are part of creating a
comfortable flying experience.
Virgin Atlantic is the tenth coolest brand according to Superbrands’ CoolBrand council.
Aiding this brand recognition is the appearance of two Virgin Atlantic aircraft in the James Bond
film, Casino Royale. Virgin Atlantic also uses celebrities for promotion, such as the Spice Girls
Competition which was a contest to name an aircraft with the Spice Girls.

1
This case was prepared by Elena Hopkins, Jay Levin, Chris Speicher, and Amy Taylor of the Fox School
of Business at Temple University under the supervision of Professor Masaaki Kotabe for class discussion
rather than to illustrate either effective or ineffective management of a situation described (2008).
Getting Off the Ground in the USA
In order to apply for a flight application from the federal government, Virgin America first
needed to show that its financing was in place. In 2000, Jet Blue entered the U.S. market with
$130 million that it had raised in capital financing. It was expected that Virgin – considered to
have a similar business model to Jet Blue – would need at least $100 million for its launch.
Virgin America actually ended up with $177.3 million from investors. The key investment
groups were Black Canyon Capital and Cyrus Capital Partners. Virgin America was also offered
$15 million in financing from the California state government to locate its headquarters in the
Bay Area. The airline had deals in place to purchase 19 aircrafts and lease an additional 15 – the
fleet consisting of Airbus A319 and A329 jets (124 and 150 passengers, respectively).
One of the biggest challenges U.K. billionaire Branson faced in setting up Virgin
America was creating an organization that met U.S. federal government laws, which state that a
U.S. airline must be at least 75% owned by U.S. entities. Therefore, Branson set up Virgin
Airlines International (VAI) Partners – a U.S.-based subsidiary of the U.K.-based Virgin Group
– that owns 75% of the capital stock and appoints 2/3 of the board of directors. The parent Virgin
Group owns the remaining 25% - the maximum allowed for foreign ownership in a U.S. airline.
In addition to the ownership requirements, the federal government mandates that all U.S.-
based airlines have “actual control” by U.S. citizens. This was a major point of contention and
led to the initial rejection of Virgin America’s United States Department of Transportation (DoT)
application and a delay in the company’s expected launch. Virgin America was ordered to
restructure to minimize the Virgin Group’s influence over the airline. A major part of this
restructuring was that the government ordered CEO Fred Reid to step down. The government
had feared that Reid’s longstanding relationships with foreign investors would create a situation
where the airline was not controlled by U.S. citizens.

Market Structure
The Airline Industry was heavily regulated by the government for its first six decades. In 1978,
the Airline Deregulation Act eliminated price and entry regulation of the U.S. airline industry.
This led to the privatization of many airlines as well as the entry of low cost carriers into the
market. Airlines gained more control over pricing. The government continues to play a role in
the regulation and taxation of the airline industry. Airlines must pay fuel duties and ticket prices
include federal taxes and security fees, all of which degrade profit margins and increase prices to
consumers. As an example of government regulation, the Department of Transportation has U.S.
citizenship requirements that require companies to be 75 percent owned and controlled by U.S.
citizens before receiving an operating certificate. Virgin America had to revise its ownership,
corporate structure and loan agreements to comply with U.S. ownership and control requirements
which delayed its launch two years.
Deregulation of the U.S. airline industry made the market attractive for new entrants,
lower fares and expanding routes and services to more cities which have stimulated competition.
Additionally, Open Skies agreements which allow reciprocal landing rights between nations are
opening up new markets in Asia, Europe and India. The United States is the largest single
market in the world with an expected annual growth rate of 3.4% (Exhibit 1). The U.S. market is

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more mature than other regions, such as Asia-Pacific which is projected to have a higher growth
market than the U.S. The U.S. Airline Industry consists of approximately 3,000 companies
making combined annual revenue of $120 billion. The industry is highly concentrated with the
top 12 companies accounting for almost 90 percent of revenue. The U.S. is also forecasted as the
top country by Airbus for the period 2006 to 2025 for passenger aircraft demand with 6,628
aircraft and by dollar value of $538 billion (Exhibit 2) both of which represent the attractiveness
of the market.

Exhibit 1: Projected Annual Growth Rates.

Exhibit 2: Passenger Aircraft Demand and Value.

The U.S. Airline Industry depends heavily on the health of the U.S. economy to generate
profits. Since many costs are fixed, companies depend on efficient operations and favorable fuel
costs for profitability. The U.S. airline industry faces many challenges including weather
instability, unforeseen catastrophes, such as the effects of the September 11, 2001 terrorist

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attacks, unionized labor and soaring fuel prices in an intensely competitive market. Customer
expectations have increased and safety and security have been called to attention. Quality
services including ticketless travel, interactive entertainment and comfortable seating are needed
to attract and retain customers. The changing market has spawned development of new business
models aimed at controlling costs.
As shown in Exhibit 3, industry revenues declined in 2001-2002 due to the economic
weakness and effects of 9/11 events. However, since 2002, revenue has steadily increased
substantially each year. Profitability did not follow rising revenues of the 2002-2006 period due
to soaring fuel costs and corporate restructuring. With improved financial footing, new cost
conscious business models, and the growing revenue trend, the industry is poised for profitability
in 2007-2011.
Exhibit 3. Total U.S. operating revenues of U.S. passenger and cargo airlines.

Industry Segmentation
The market is segmented into low cost carriers at one extreme and legacy airlines operating at a
premium at the other extreme (Exhibit 4). Low cost carriers, such as Southwest airlines, have
adopted simplified business models that operate a point-to-point network. They primarily focus
on the use of one fleet type with no frills to minimize operating costs. Legacy airlines, such as
American Airlines, have a more complex business model that operate a hub and spoke network.
They tend to carry multiple fleet types and more amenities which increase operating costs. There
are also intermediate carriers, such as Virgin America, which claim to be a lower cost with better
amenities. These intermediate carriers may blend aspects of the two extremes such as a point-to-
point network with multiple fleet types to become competitive in the market.

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Exhibit 4. Airline Industry Segmentation (from IBM Corp.)

Source: Brian O’Rourke, 2006 Airline Industry Segment Trends and Direction. IBM Business
Partners.

Competition
One of Virgin America’s greatest challenges as a new entrant into the U.S. market is positioning
itself appropriately within the strong field of competition to appeal to consumers and gain market
share to achieve profitability. Virgin America faces competition from all industry segments. A
few key competitors in the low and intermediate segments are highlighted below.

Southwest
Southwest has been both the low cost founder in U.S. and the industry leader on providing high
quality service at reasonable prices. Southwest describes its simple philosophy on the company
website:
Southwest has provided consistently improving service, low prices and increasing return
to investors as they have grown from one of the smallest airlines in the U.S. to one of the largest
– currently flying over 100 million customers annually to 63 destinations with over 3,300 flights
a day (500 planes). They have done so with the fewest customer complaints in a culture that
many have tried to emulate. In 1972, Southwest was the innovator of the “10 minute turn”,
whereby planes remained on the ground for 10 minutes or less between flights.

JetBlue
JetBlue was started by former Southwest personnel. It is managed using the Southwest model
and operated using the same operational and marketing systems that made Southwest so
enviable. The model worked flawlessly until February of 2007, when a sudden and severe ice
storm closed most major airports in the east and left hundreds of JetBlue passengers stranded

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aboard planes on the tarmacs of JFK. The airline and its management were trashed by the press.
David Neeleman, the founder and CEO of JetBlue was forced to hand over responsibility for day
to day operations to his second in command and the airline became the first to introduce a
“Customer Bill of Rights”. The model that has worked so well for Neeleman may be challenged
as the airline grows in size via expansion into new markets and infrastructure improvements at
JFK.

AirtTran
AirTran’s Mission Statement is “Being the best in everything we do every day: Innovative
People dedicated to delivering the best flying experience to smart travelers. Every day.” AirTran
continues to be the fastest growing low cost airline in the U.S. and today it employs over 9,000.
The airline set records for revenue and passengers in the second quarter of 2007, serving over 6.3
million people.
AirTran has a history of notoriety starting with its predecessor airline, ValuJet, which
was founded from Southern Airlines and Eastern employees in 1992. Through a long series of
mergers and acquisitions, AirTran became a dominant player in 1995. Since then, they have
grown from serving 24 cities in the eastern and southern U.S. to over 56 cities coast-to-coast on
over 700 flights per day (over 20 million passengers per year!). They recently became part of the
Fortune 1000.
AirTran has consistently been able to control costs with 20%+ growth in an industry
where cost control is needed for survival. They have had 8 consecutive profitable years despite
difficult conditions. Furthermore, they have been able to cut non-fuel related costs in each of the
past 6 years – an amazing feat in the industry.

Skybus
Skybus advertises itself as a startup that knows it is in a highly competitive and volatile industry.
They clam that their goal is to keep it “simple” and “amazingly affordable.”
Skybus has attracted some of the best and brightest talent from other low cost airlines like
Southwest and RyanAir in Europe. Skybus plans to stay competitive by controlling costs such as
moving bags between flights, flying in and out of less congested airports, and other measures,
which would allow it to consistently offer low fares. The company envisions itself becoming an
American version of RyanAir.
Skybus currently offers direct flights from Columbus, Ohio to a limited number of cities.
By the end of 2007, they will fly to over 14 cities between the east and west coasts, initially
concentrating on the far west and Florida.

Market Share Distribution

As shown Exhibit 5, Southwest holds 12.2% of the market in terms of Revenue Passenger Miles
and is second only to legacy carrier, American. JetBlue and AirTran are also in the top ten
airlines of domestic market share with 4.2% and 2.7%, respectively.

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Exhibit 5. U.S. Market share based on Domestic Revenue Passenger Miles from the U.S.
Department of Transportation.

Source: U.S. Department of Transportation. Bureau of Transportation Statistics.

http://www.transtats.bts.gov/

Virgin’s Competitive Strategy

The following position map (Exhibit 6) shows how Virgin America compares to highlighted
competitors based on two key competitive factors – destination options (e.g.
number/attractiveness of destinations) and flying experience. These factors were chosen since
prices are very similar in this market segment, making it difficult to differentiate between airlines
based solely on price.

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Exhibit 6. Position Map of Virgin America with Southwest, AirTran, Skybus and JetBlue.

Hi

Southwest
Destination Options

AirTran

JetBlue

Low
Skybus Virgin

Low Hi
Flight Experience

Virgin America’s main competitive strategy is to improve the flying experience for each
customer by adding several in-flight amenities, such as:

Mood lighting
3000 MP3s available on every flight
Fresh food available whenever you want (using on-screen ordering at your seat)
Large selection of pay-per-view movies on demand
Branson has stated that U.S. carriers treat their customers more like cattle than people and
that Virgin is going to redefine the industry using great service and cool features. Branson has
demonstrated he knows how to control costs with his other airline investments, but airline
customers have shown little interest in small issues like mood lighting and far greater interest in
pricing. With the U.S. being a low context culture, pricing remains the biggest determinant of
the flying public. Even so, the airlines continue to raise the bar on each other by providing
services like leather chairs and seatback entertainment systems; when one airline offers a new
feature, another is matches it or raises the stakes.
Virgin is using a new twist with its marketing strategy to differentiate itself from its
competitors – adding amenities that appeal to more tech-savvy flyers. While this approach is
somewhat different, much of its offerings already are part of its competitors’ portfolios. JetBlue,
for example, offers most of the same amenities to its tech-savvy flyers with slight variations.
SkyBus claims that its new planes will offer all features that are offered by their major
competitors. The airlines that survive will be the ones who succeed in maximizing flight
experiences in the minds of their customers while controlling costs to limit prices. Effective
marketing strategies can also help attract new customers and steal competitors’ customers by
targeting correct segments and tailoring promotions to those identified segments.

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Do Americans Like to Fly?
According to a Mintel Report2 that is based on January 2007 data, more than three quarters of
Americans take at least one flight a year. The main motivations for people to fly are vacation
(58%) and personal (30%) travel both inside and outside the U.S. (Exhibit 7). Vacation travelers
dominate the market for airfares.
Exhibit 7. Reasons for Air Travel

Because vacation/personal travel makes up the majority of all domestic flights,

passengers who flew for these reasons show similar flight frequency, with 46 percent of
passengers who took any vacation/personal trips by plane as annual flyers, 47 percent multiple
flyers and just 7 percent frequent flyers. This indicates that almost half the market for vacation
air travel is made up of passengers who only fly once a year and are probably less likely to be
loyal to a particular airline than multiple flyers.

Frequency of personal round trip flights depends highly on household income. Younger
passengers (aged 18-24) are less likely to use airline services because they have less money to
spend on travel and are unlikely to have jobs that require them to fly. This demographic is price
sensitive and would be a potential target for Virgin America.

Passengers who take personal and vacation flights are more likely to make their own
reservation online or by phone (77%) than using a travel agent (10%) or having someone else
make their booking (11%). This highlights the importance of an airline’s website for sales,
particularly making searching for fares and booking simple. Virgin America’s website is
designed to make the travel experience as smooth as possible offering flight information,
itineraries, etc. Additionally, VA offers ticket sales through the comprehensive online travel

2
US Airlines -- January 2007 – The Consumer. Mintel International Group Limited. October 1, 2007.
http://libproxy.temple.edu:2322/sinatra/mintel/

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company, Orbitz, with potential expansion to other sites. With online ticket sales, Virgin
America caters to the passengers who make their own reservations, which represent majority.

Business travel customers value convenience and amenities such as online booking,
access to business lounges and frequent flyer miles. And business travelers are key customers
for the airlines as they fly often. Yet, many passengers fly only once a year for a conference or
other annual event. This tendency is evidence of the need for airlines to court businesses just as
actively as the business traveler. The key age group for business flights is passengers aged 35-44.
Male passengers on average take more than twice as many business flights as female ones.

What is important for Americans in flying?

Low fares are clearly important with about 65% of passengers almost always or occasionally
choosing or changing the dates of their travel based on the availability of cheaper fares. This
statistic is not surprising since the U.S. is a low context culture. Only a third of passengers have
tried slower means of transportation to avoid flying, which demonstrates the high demand for air
travel in the U.S.

An interview conducted by Mintel of consumer attitudes towards choosing an airline

(Exhibit 8) indicates that passengers usually choose air travel for its convenience, but do not find
it a particularly comfortable experience and are less convinced that they get value for money.
This finding implies that airlines should stress the value their fares offer, perhaps through
improved amenities.

Exhibit 8. Attitude Ratings (October 2006)

Virgin America, with its low prices, targets travelers who want value without sacrificing
service. With its advanced in-flight technology, Virgin America appeals to tech savvy travelers
of all demographics. Virgin America’s aircraft amenities are for those who value comfort.

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Virgin’s comfort features, such as advanced in-flight entertainment systems (e.g. games, online
chat rooms, etc.), custom designed leather seats, first class cabin with massage chairs and 55-
inch seat pitch will appeal to many consumer segments.

Target Consumers

Virgin America is currently targeting tech savvy flyers – passengers who typically book flights
online. One can find any information on its website <www.virginamerica.com>, from schedules
and routes to in-flight food menus. With the slogan “Virgin America flying is believing”, the
company targets consumers who are interested in reinvigorating their flying experience with
comfort, convenience and cutting-edge in-flight technology. The website focuses on presenting
differences from other airlines with superb amenities being the most important part. It positions
the company and its services to emphasize fun and comfort with the potential to cater to
travelers’ interests or requests.

Advertising and Promotions

As a newcomer to the market, Virgin America uses advertising and promotions to build brand
awareness and equity. In June 2007, prior to launch, VA held a contest to name its 10 initial
planes. Eight names were selected from the websites naming contest that received tens of
thousands of entries. In August 2007, VA auctioned a pair of tickets (as well as hotel
accommodations) for both of its inaugural flights for charity to help disadvantaged kids get the
education they deserve. Despite already low fares, Virgin America also has special fare sales to
reduce ticket prices even more, such as the “Belt Tightening” Holiday Fare Sale. In November
2007, VA announced that it would host an in-flight pajama party with Victoria's Secret
supermodels. Virgin America and Victoria's Secret hosted the first ever in-flight PJ party and
fashion show aboard a regularly scheduled late night Virgin America flight from New York
(JFK) to Los Angeles (LAX) on November 28. A few lucky flyers received makeovers using
Victoria’s Secret brand makeup. Everyone received free Victoria's Secret pajamas and cosmetic
totes filled with travel sizes of Victoria's Secret beauty products. Virgin America also has short
movie clips posted on the popular website YouTube that show the interior and exterior of the
plane with former CEO Fred Reid as the tour guide.

As a tech-savvy company, Virgin America is also using a not-so-traditional marketing

method. Virgin America uses blogs (web logs) to get its brand recognized in the world-wide-
web with the help of well-known bloggers of BoingBoing, Engadget, and Diggnation. These
bloggers are featured on online ads for Virgin America. The online ads are short entertaining
cartoons featuring the “Virgin Americans” that introduce features and amenities of Virgin
America’s flights. These ads can be downloaded to both a personal computer and an iPod.
There are currently 10 ads that may be viewed from http://onboard.virginamerica.com/. Virgin
America also has a series of “Everybody likes…” posters that advertise the differentiating
amenities that they offer that can be accessed from this link as well.

In an effort to build a loyal consumer base, Virgin America offers a membership program
called eleVAte through its website. With eleVAte, a passenger earns 5 points for every $1 that
he spends on Virgin America. Later, it is possible to redeem 4,900 points for a free trip, which

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may be accumulated with as few as four roundtrips. Members also are able to redeem points for
any unsold seat on any flight at any time; no blackout dates, no capacity restrictions. Members
have access to online features to manage airline travel and check earned points. In addition, the
company offers parties, special events, dream trips, and “space travel” to loyal passengers.

Conclusion

Virgin America appears to have an interesting competitive strategy in the intermediate-priced

airline market. However, they will likely find it difficult to gain significant market share using
upgraded amenities because low context American consumers seem to base airline choices
almost entirely on fares, times, and destination convenience. Most people will simply pick the
cheapest flight that gets them where they want to go when they want to be there. Virgin’s fate
will ultimately be determined by their ability (or inability) to carve out a niche with tech savvy
travelers who frequently fly back and forth between its few destinations. When Virgin
America’s first annual report comes out later this year or early next year, investors will be able to
determine the effectiveness of Virgin’s marketing strategy in the short run and decide whether
the company can continue to compete on an “enhanced flight experience” basis or if it will need
to pursue a different competitive strategy to become profitable.

Discussion Questions

1. Does Virgin America offer the right mix of amenities and low cost to become
competitive and profitable in the fragmented airline industry?

2. Will VA's strategy of enhancing the flying experience ultimately be successful in the
U.S.? Why or why not?

3. Virgin America is a part of the Virgin Group, which resides in the UK - a higher context
culture than the U.S. Do Virgin America’s marketing strategies demonstrate awareness
of the cultural context differences?

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